Canadian dollar forecasts turn less bullish as trade deal remains elusive

The Canadian dollar will strengthen less than previously expected over the coming year if the time it takes for Canada to reach a trade deal with the U.S. raises prospects of additional Bank of Canada interest rate cuts, a Reuters poll found.

The median forecast of 33 foreign exchange analysts in the November 28-December 3 poll predicted the Canadian dollar CAD= would strengthen 0.3 per cent to 1.39 per U.S. dollar, or 71.94 U.S. cents, in three months, compared to 1.37 expected in a survey last month.

In 12 months, the currency was forecast to gain 2.5 per cent to 1.36, versus 1.35 expected previously.

“With the federal budget a bit of a damp squib and any form of new trading arrangement with the U.S. still months off, it is hard to see what will kick start the recovery if not accommodative monetary policy,” said Bradley Saunders, North America economist at Capital Economics.

“We therefore still expect the Bank to lower its policy rate below its estimated neutral range around the middle of next year, once core inflation is back near to target.”

The BoC has signaled a possible end to its easing campaign after cutting its benchmark interest rate in October to a three-year low of 2.25 per cent. That’s the bottom of the 2.25 per cent to 3.25 per cent range the central bank has estimated for the neutral rate - the level at which policy neither stimulates nor restrains the economy.

Investors expect rates to be left on hold at a policy decision next week and are pricing in 9 basis points of additional easing by July next year.

Talks have broken down on a trade deal in key sectors between the U.S. and Canada, while the United States-Mexico-Canada Agreement, which has shielded much of Canada’s exports from U.S. tariffs, is up for joint review in 2026.

Canadian Prime Minister Mark Carney’s maiden budget last month committed billions of dollars to fight U.S. tariffs, boost defense spending and diversify trade but some analysts have said that the level of new stimulus was not enough to sharply raise their economic outlook.

Fewer-than-expected interest rate cuts from the Federal Reserve could also reduce upside prospects for the Canadian dollar.

“In the U.S., we think robust economic activity – driven in part by the ongoing AI investment boom – combined with sticky core inflation will lead the Federal Open Market Committee (FOMC) to pause its easing cycle before long,” Saunders said.

(Reporting by Fergal Smith; Polling by Renusri K and Mumal Rathore; Editing by Sharon Singleton)